Commentary on a Month to Remember!

Commentaries On Economic And Financial Matters; September to Present.
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Saturday, October 04, 2008

Bailout Approved But US Stocks And Employment Fall

The US Congress approved the financial rescue package yesterday but US stocks fell anyway. From Bloomberg:

U.S. stocks slid, capping the worst week for the Standard & Poor's 500 Index since the 2001 terrorist attacks, on concern the $700 billion bank bailout isn't enough to unlock credit markets and prevent a recession... The S&P 500 declined 15.05 points, or 1.4 percent, to 1,099.23. The Dow Jones Industrial Average lost 157.47 points, or 1.5 percent, to 10,325.38. The Nasdaq Composite Index slipped 29.33, or 1.5 percent, to 1,947.39. More than three stocks decreased for each that rose on the New York Stock Exchange. There are good reasons for investors to fear a recession, not least the continuing deterioration in nonfarm payrolls. From Bloomberg: The U.S. lost the most jobs in five years in September and earnings rose less than forecast as the credit crisis deepened the economic slowdown. Payrolls fell by 159,000, more than anticipated, after a 73,000 decline in August, the Labor Department said today in Washington. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.

Fortunately, the services sector kept its head above water in September. Bloomberg reports:

The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, decreased to 50.2, higher than forecast, from 50.6 in August, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction. Still, the prognosis for the US economy is not good. The ECRI's Weekly Leading Index edged up to 122.2 in the week to 26 September from 122.1 in the previous period but its annualized growth rate fell from minus 12.3 percent to minus 13.3 percent, the lowest since 25 February 1975. From Reuters: "With WLI growth plunging to its lowest reading since the severe 1973-75 recession, the 2008 recession is set to get noticeably worse," said Lakshman Achuthan, managing director at ECRI.

And it's no better in Europe.

In the UK, the services sector contracted at the fastest rate for at least 12 years, the Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for services companies falling to 46.0 in September from 49.2 in August.

It was little better in the euro area. Markit's eurozone services purchasing managers' index slipped to 48.4 in September from 48.5 in August. However, retail sales rose 0.3 percent in August, although that still left it 1.8 percent lower than a year earlier.


Friday, October 03, 2008

ECB Discusses Rate Cut, Imf Looking At Sharp US Downturn

The ECB has moved to an easing bias. Bloomberg reports:

European Central Bank President Jean-Claude Trichet indicated the bank is poised to cut interest rates for the first time in more than five years as the credit crunch hurts the economy and damps inflation. Investors are betting the ECB will lower borrowing costs as soon as next month after Trichet told a press conference in Frankfurt that policy makers discussed a rate reduction today. While leaving the benchmark at a seven-year high of 4.25 percent, Trichet said financial-market turmoil is damping economic growth and inflation risks "have diminished."

Markets are certainly giving Trichet reasons to worry about the credit crunch. Again from Bloomberg:

The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve... Stocks dropped for a second day as reports showed a worsening economy, and Treasury yields fell as traders speculated central banks will have to cut interest rates to prevent a global recession. The Standard & Poor's 500 Index slid 46.78, or 4 percent, to 1,114.28. The yield on two-year notes tumbled 19 basis points, or 0.19 percentage point, to 1.62 percent, according to BGCantor Market Data.

And how badly is the US economy worsening? Quite badly, it seems. From Bloomberg:

Orders to U.S. factories fell in August by the most in almost two years, signaling that business spending slowed down even before the recent worsening of the credit crunch. The 4 percent drop in bookings was larger than forecast and followed a 0.7 percent increase in July that was smaller than previously estimated, Commerce Department figures showed today in Washington... Excluding demand for transportation equipment, which tends to be volatile, factory orders decreased 3.3 percent, the most since September 2001... Bookings for all durable goods, which make up just under half of total orders, fell 4.8 percent in August, more than the Commerce Department estimated last week. Non-durable goods orders, including those for food, petroleum and chemicals, dropped 3.3 percent after. Today's revision also made the outlook for business investment even dimmer. Bookings for capital goods excluding defense and aircraft, a proxy for future business spending, fell 2.4 percent in August compared with the 2 percent decline estimated last week. Shipments of such goods, which the government uses to calculate gross domestic product, decreased 2.1 percent, also worse than previously estimated and the biggest drop since January 2007.

Meanwhile, the labour market continues to deteriorate.

The number of people collecting jobless benefits rose to 3.59 million in the week ended Sept. 20, the most since 2003, the Labor Department reported today. First-time claims jumped to 497,000 in the week ended Sept. 27, reflecting job losses in the aftermath of the Gulf Coast hurricanes. And James Hamilton points out that auto sales in the US deteriorated further in September, "which is consistent with the view that the U.S. economy has been in recession and took a sharp turn for the worse last month".

Even the IMF has joined the gloomy bandwagon. From Bloomberg:

The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said in its most pessimistic outlook for the world's largest economy since the credit crisis began last year. "The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," the fund said in a section of its semiannual World Economic Outlook released in Washington today. There is "a substantial likelihood of a sharp downturn in the United States," the fund said.

It was slightly more optimistic though about the euro area.

The 15 countries that use the euro may be able the weather financial shocks and slowing growth, the IMF said. "In the euro zone, by contrast, the relatively strong position of households offers some protection against a sharp downturn," the report stated.

Thursday, October 02, 2008

US Economy Looking Gloomy Too

Thursday was the US economy's turn to look gloomy. From Bloomberg:

Manufacturing in the U.S. contracted in September at the fastest pace since the last recession as the credit crisis spread beyond Wall Street. The Institute for Supply Management's factory index dropped to 43.5, the lowest level since October 2001... Other reports today signaled the U.S. continues to lose jobs. ADP Employer Services said companies in the U.S. cut an estimated 8,000 workers from payrolls in September after a 37,000 decrease in August, according to figures based on payroll data... Firing announcements increased 33 percent in September from that same month last year, Chicago-based Challenger, Gray & Christmas Inc. said in a statement. The Commerce Department also reported that construction spending stalled in August after a revised 1.4 percent drop the previous month that was more than twice as large as previously estimated. Private residential building increased for the first time since March 2007 and work on commercial projects fell for a fourth month.

Morgan Stanley's Richard Berner says that "the issue now is not whether a recession is likely, but how deep it will be and how long it will last".

And perhaps how widespread too. Europe is not faring any better, as Bloomberg reports.

European manufacturing contracted more than initially estimated and unemployment rose to the highest in a year as the deepening credit crisis slowed growth. Markit Economics's manufacturing index dropped to 45 in September from 47.6 in August, lower than the 45.3 published on Sept. 23. Unemployment in the euro region rose to 7.5 percent in August, the highest since April 2007, from a revised 7.4 percent in July, according to a separate report. And in the UK, the Chartered Institute of Purchasing and Supply/Markit PMI fell to 41.0 in September from a downwardly revised 45.3 in August.

China bucked the trend in manufacturing though. The official CFLP PMI rose to 51.2 in September from 48.4 in August.


Wednesday, October 01, 2008

US Stocks Rebound But It's Looking Gloomy In Japan

US stocks surged yesterday on renewed hopes for the bailout plan. Bloomberg reports:

U.S. stocks jumped the most in six years as growing expectations that lawmakers will salvage a $700 billion bank-rescue package helped the Standard & Poor's 500 Index recover more than half of yesterday's 8.8 percent plunge... The S&P 500 rose 58.35 points, or 5.3 percent, to 1,164.74, its biggest rally since July 2002. The Dow Jones Industrial Average jumped 485.21, or 4.7 percent, to 10,850.66 and earlier gained more than 500 points. The Nasdaq Composite Index added 5 percent to 2,082.33. More than five stocks climbed for each that fell on the New York Stock Exchange.

On the whole, economic data, although not the focus for investors, also didn't hinder the rally too much.

Consumer confidence unexpectedly rose in September in a survey taken before the recent worsening of the credit crisis and plunge in stocks. The Conference Board's confidence index rose to 59.8, a third consecutive increase, from 58.5 the prior month. A separate report showed home prices fell in July at the fastest pace on record from a year earlier. A measure of U.S. business activity slowed for the first time in seven months as new orders and inventories weakened. The National Association of Purchasing Management-Chicago said its business index decreased to 56.7 this month from 57.9 in August. Fifty is the dividing line between growth and contraction.

But the credit crisis is certainly not over.

The London interbank offered rate, or Libor, that banks charge each other for overnight loans jumped 431 basis points to an all-time high of 6.88 percent, the British Bankers' Association said today.

Meanwhile, the economic reports coming out of Japan have been pretty gloomy. From AFP/CNA:

Japan's unemployment rate rose to 4.2 per cent in August from 4.0 per cent in July with only 86 jobs on offer for every 100 job seekers, the lowest since September 2004, official figures showed... Separate government data showed industrial production dropped by 3.5 per cent in August from the previous month, the steepest fall since comparable records began in 2003... Official figures said household spending tumbled by 4.0 per cent in August from a year earlier, a much bigger drop than an expected decline of about 1.4 per cent.

Other reports corroborate the weakness in manufacturing. From Reuters on Monday:

Manufacturing activity in Japan fell to its lowest point in 6-½ years in September as companies recoil amid an uncertain economic outlook and financial market turmoil... The PMI declined to a seasonally adjusted 44.3 in September from 46.9 in August, pushing it further below the 50-point mark that points to a contraction in manufacturing.

And from Bloomberg today.

Japan's largest manufacturers turned pessimistic about the prospects for business for the first time in five-years as a deepening U.S. financial crisis stifled demand in the country's export markets. The Tankan index of confidence among big makers of cars and electronics slid to minus 3 points in September from 5 in June, a fourth quarterly drop, the Bank of Japan said today in Tokyo. The first negative reading for the index since 2003 indicates pessimists outnumber optimists.

Tuesday, September 30, 2008

No bailout for Wall Street

At least not yet. Bloomberg reports:

The financial-rescue plan intended to restore confidence in the U.S. banking system collapsed in partisan wrangling as the House of Representatives voted down the proposal backed by the Bush administration and congressional leaders of both parties. Markets plunged as the House rejected, by a vote of 228 to 205, the $700 billion measure to authorize the biggest government intervention in the markets since the Great Depression. The Dow Jones Industrial Average fell 778 points, or 6.98 percent to 10,365, the biggest point drop ever. The Standard & Poor's 500 Index fell 8.4 percent, the most since Oct. 26, 1987.

This could spell more trouble for an economy that's already sputtering. From Reuters:

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise. Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain...

And the economy is looking bad in Europe too. From Bloomberg:

European confidence in the economic outlook fell to the lowest since the slump in the wake of the Sept. 11 terrorist attacks after a global credit squeeze claimed U.S. and European institutions and sent stocks plummeting. An index of executive and consumer sentiment dropped to 87.7 in September from 88.5 in August, the European Commission in Brussels said today. That is the lowest since the index fell to 86.6 in November 2001.

Monday, September 29, 2008

It's raining bailouts

The US government may be about to bail out Wall Street but there's more trouble on the other side of the Atlantic. Reuters reports:

A swathe of bank rescue deals took shape around Europe on Monday and fear gripped financial markets before a U.S. lawmaker vote to push through a $700 billion fund to deal with toxic debt... The governments of Belgium, the Netherlands and Luxembourg moved to part-nationalize Belgian-Dutch group Fortis with an injection of over $16 billion. British mortgage lender Bradford & Bingley was brought under the government's wing. Shares in French bank Dexia tumbled on a report it might need emergency capital, and bank rescue deals emerged in Iceland, Russia and Denmark too. U.S. stock futures pointed to a drop at the opening bell on Wall Street, and Europe's FTSEurofirst fell more than 3 percent with bank stocks among the heaviest fallers... The dollar climbed, mainly due to the euro and pound sliding about 1 percent, as the toll on financial firms spread in Europe and stirred expectations that central banks may have to respond by cutting interest rates. Money markets remained frozen with banks refusing to lend to each other for all but the shortest periods.

Saturday, September 27, 2008

US Growth Revised Down, Outlook Remains Weak

US economic growth in the second quarter was not as good as previously estimated. Reuters reports:

The Commerce Department said gross domestic product, the measure of total goods and services output within U.S. borders, expanded at a 2.8 percent rate from April to June, rather than the 3.3 percent rate it had estimated a month ago... Growth in consumer spending was weaker than first estimated, pulling down the estimate of overall growth, while businesses made bigger cuts to investments, a sign confidence was sagging even before financial market turmoil deepened.

On the day, US investors didn't look too concerned.

Stocks on Wall Street gained by the close, overcoming earlier losses, as traders clung to hopes that the government would manage some kind of bailout for the beleaguered financial system.

But over the past month, consumers have become more pessimistic.

The Reuters/University of Michigan Surveys of Consumers said its final consumer sentiment index reading slipped to 70.3 from 73.1 in early September— its worst slide within a single month since August 2005, when Hurricane Katrina caused widespread dislocation.

And broader leading indicators point in the same direction, according to another Reuters report.

The Economic Cycle Research Institute...said its Weekly Leading Index fell to 122.2 in the week to Sept. 19, its lowest reading since the week to April 25, 2003, when it stood at 120.7. Last week's figure was 125.0, revised from 125.1. Its annualized growth rate plunged to negative 12.3 percent from minus 11.5 percent in the previous week, matching a low reached in June 6, 1980 according to ECRI data.

Friday, September 26, 2008

Japan's Trade Moves Into Deficit As US Economy Weakens

Can you imagine it? Japan now has a trade deficit. Reuters reports:

Japan's trade balance swung into its biggest effective deficit in more than 25 years in August as exports to the United States fell by the biggest amount on record, underscoring economists' views that Japan is in recession. Excluding January, when Japanese exports tend to drop on slower factory activity in the New Year holidays, it was the first deficit since 1982, when Japan was reeling in the aftermath of an oil crisis... Exports edged up 0.3 percent in August from a year earlier, short of a median forecast for a 2.4 percent rise, Ministry of Finance data showed on Thursday. Imports grew 17.3 percent versus an expected rise of 21.1 percent, as the import value of crude oil hit a record high, bringing Japan's trade balance to a deficit of 324 billion yen ($3.06 billion), against a deficit of 400 billion yen expected... Japan's exports to the United States fell a record 21.8 percent in August, marking the 12th straight month of annual declines, on sluggish shipments of automobiles.

The weakness in exports to the US looks set to continue to be a drag on the Japanese economy.

Bank of Japan board member Tadao Noda said the U.S. economy could face a deeper adjustment after several major U.S. financial institutions collapsed or came close to it in recent weeks... While repeating the bank's line that the economy will eventually return to growth, Noda said he expected world economic growth to recover only in 2010 after slowing in 2008 and 2009.

But we don't even have to wait for the impact of the latest financial failures. Data out of the US yesterday provided evidence that the economy is already faltering. Bloomberg reports:

Sales of new homes in the U.S. fell in August to a 17-year low and orders for durable goods dropped more than forecast, evidence of the mounting risks to the economy that Federal Reserve Chairman Ben S. Bernanke warned of yesterday. Home sales decreased 11.5 percent, more than forecast, to the lowest annual rate since the 1991 recession and the median price sank to a four-year low, figures from the Commerce Department showed today in Washington. Bookings for goods meant to last several years declined 4.5 percent and orders excluding transportation equipment were down 3 percent.

Thursday, September 25, 2008

Confidence Drops In Europe, As Do US Existing Home Sales

The bad news on the European economy continues. From Reuters:

Business confidence dropped in Germany, France and Italy in September, surveys showed on Wednesday, adding to fears the euro zone is sinking into recession as the effects of U.S. financial turmoil spread across the Atlantic... The Ifo said its closely-watched business climate index, based on a monthly poll of around 7,000 firms, fell to 92.9 from 94.8 in August. More worrying for the outlook was a sharp drop in the component of the index which measures corporate expectations for the next half year. That measure dipped to 86.5, its worst reading since Feb. 1993.

And it's a similar story in the US. From Bloomberg:

Sales of previously owned U.S. homes fell more than forecast in August and prices dropped the most on record as Federal Reserve Chairman Ben S. Bernanke suggested the housing market may get worse before it gets better. Sales of existing homes dropped 2.2 percent to an annual rate of 4.91 million units from 5.02 million the prior month, the National Association of Realtors said today in Washington. The median price declined 9.5 percent from August 2007 and the number of properties fell from a record. Bernanke told lawmakers that lenders will become "still more cautious," with terms on home loans tightening "significantly." The slide in property values threatens to hurt consumer spending, which Bernanke said today would be "sluggish at best" in coming months.

Wednesday, September 24, 2008

Eurozone Economy Contracts, Bernanke Says US May Follow

The eurozone economy is not looking in good shape. From Bloomberg:

Europe's manufacturing and service industries contracted at the fastest pace in almost seven years in September as the credit-market seizure intensified and companies scaled back production in response to slowing orders. Royal Bank of Scotland Group Plc's composite index dropped to 47, the lowest since November 2001, from 48.2 in August. Economists had forecast a decline to 47.8, according to the median of 21 estimates in a Bloomberg News survey... Markit's manufacturing index fell to 45.3 this month from 47.6 in August, below economists' forecasts, while the services index fell to 48.2 from 48.5... A separate report today showed industrial orders in the euro area rose 1 percent in July from the previous month and were up 1.6 percent from a year earlier. Excluding the volatile transport category, orders fell 1.4 percent on the month and dropped 2.1 percent over the year.

With the Treasury's bailout plan not getting a smooth ride in Congress, the US economy also faces possible contraction. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will shrink if markets don't begin functioning normally, joining Treasury Secretary Henry Paulson in urging skeptical lawmakers to quickly pass a $700 billion rescue for financial institutions. "I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover," Bernanke told the Senate Banking Committee today. "My interest is solely for the strength and recovery of the U.S. economy." Lawmakers have balked at rubber-stamping the Treasury plan to remove illiquid assets from the banking system, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans resisting the plan's reach and size.

Tuesday, September 23, 2008

US Dollar And Stocks Fall, Oil Jumps

The US government's bailout plan for the financial sector is having a dramatic impact on the US dollar. Bloomberg reports:

The dollar weakened the most against the euro since January 2001 on concern a U.S. proposal to buy $700 billion of troubled assets from financial firms will inflate the budget deficit. The greenback dropped for a fourth day yesterday in its longest stretch of decline since June as Treasury Secretary Henry Paulson's plan to bail out banks from the credit crunch failed to restore investor confidence in U.S. assets... The dollar traded at $1.4786 per euro at 6:20 a.m. in Tokyo, after dropping 2.1 percent yesterday, when it touched $1.4866, the weakest level since Aug. 22... The dollar was at 105.47 yen, following a 1.8 percent drop... The Standard & Poor's 500 Index retreated 3.8 percent yesterday, led by regional banks that may get hurt by the bailout. Crude oil for October delivery rose 14.8 percent to $120 a barrel on the New York Mercantile Exchange. The more-active November contract rose $6.62.

The fall in stocks yesterday indicates some flight to safety. As further evidence, Treasuries held up well, as noted by Bloomberg.

Two-year Treasury notes rose for the first time in three days as stocks tumbled, bolstering demand for the relative safety of government debt while lawmakers consider a bailout of the U.S. banking sector. Yields on two-year notes had surged the most in 23 years on Sept. 19... The benchmark two-year note's yield fell 6 basis points, or 0.06 percentage point, to 2.14 percent at 5:02 p.m. in New York, according to BGCantor Market Data... The 10-year note's yield fell less than 1 basis point to 3.83 percent, after surging 28 basis points on Sept. 19...

Still, a bailout should generally be positive for risky assets and negative for Treasuries and the US dollar. Markets will likely fluctuate over the next few days with the prospects for the bailout plan.

Saturday, September 20, 2008

US Government Plan Drives Market Surge

Finally, US government officials are coming up with a comprehensive plan to stop the financial crisis. Bloomberg reports:

The U.S. government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression. "We're talking hundreds of billions," Treasury Secretary Henry Paulson said in a press conference. "This needs to be big enough to make a real difference and get to the heart of the problem." The Treasury is likely to run the program, which would involve auctions where the government buys devalued assets, said House Financial Services Committee Chairman Barney Frank. The plan is designed as a comprehensive approach after a series of individual rescues failed to stem the crisis.

Markets reacted explosively. MarketWatch reports:

U.S. stocks rocketed higher Friday, with the major stock indexes wiping out a week of shattering losses, as Wall Street cheered the government's moves to kick-start credit markets as well as plans to move against short sellers... The Dow Jones Industrial Average rose 368.75 points to end at 11,388.44, a lapse of 0.3% from a week ago... On the New York Mercantile Exchange, gold futures plunged the most in more than 25 years, with the spot month closing down $32.30 at $864.70 an ounce. Read Metals Stocks. The price of oil gained, with crude futures recently up $6.67 to end at $104.55 a barrel. See Futures Movers. The dollar slipped as investors pondered the possibly negative aspects of the nascent U.S. government plan to take on the toxic assets plaguing the financial sector. See Currencies. Treasury prices plunged, sending yields on benchmark notes up the most in two decades. Read Bond Report. Overseas, Chinese stocks in Shanghai and Hong Kong surged more than 9% See Asia Markets. European shares surged to their best one-day percentage gain ever, with the Pan-European Dow Jones Stoxx 600 climbing 8.3%. Read more. Emerging-market stocks around the globe also rallied. See Emerging Markets Report.

Steve Waldman at Interfluidity is somewhat less thrilled with the plan though.

Today's big news is the hint of a bail-out to end all bail-outs. I often have mixed feelings about Robert Reich's commentary, but I commend to you his piece today. There is no question that we are going to spend a lot of public money to address the current crisis... The question we should be asking is not whether or how much, but to whom and for what... As far as the money is concerned, throw it at infrastructure. Increase worker bargaining power by offering Federally funded retraining sabbaticals for any worker over thirty who decides they want to retool. I'd rather see a new WPA than a new RTC. If it is true that during a debt deflation, the government can spend freely without fear of inflation, let's spend in a way that balances the economy, not in a manner that tries to ratify the imbalances that brought us here in the first place.

Friday, September 19, 2008

Another Government Intervention, Another Market Surge

The latest interventions by policymakers produced more positive effects on markets yesterday. Bloomberg reports:

U.S. stocks rallied the most in six years on prospects the government will formulate a "permanent" plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages. Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent.

Earlier, there had been coordination by central banks to improve liquidity in credit markets. From Bloomberg:

The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the aftermath of the 1929 Wall Street crash. The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion "to address the continued elevated pressures in U.S. dollar short-term funding markets." The Bank of England, the Bank of Canada and the Swiss National Bank also participated. Several of them lent funds in their own currencies as well with the Fed adding a record $105 billion in temporary reserves.

Still, the prospects for the US economy remains poor. Again from Bloomberg yesterday:

The U.S. economy was heading for a deeper slowdown than forecast even before this month's collapse in financial markets, a gauge of its future performance showed. The Conference Board's index of leading indicators, which points to the direction of the economy over the next three to six months, fell 0.5 percent [in August]... The leading-indicator index fell at a 2.1 percent annual pace over the past six months. A decline of around 4 percent to 4.5 percent at an annual pace is one signal a recession is imminent, according to the Conference Board. The gauge met that requirement in January, when it dropped at a 4.7 percent pace... The index of coincident indicators, a gauge of current economic activity, fell 0.1 percent after no change in July.

Other indicators though continue to give conflicting signals.

A separate report today showed manufacturing in the Philadelphia region unexpectedly expanded in September. The Federal Reserve Bank of Philadelphia's general economic index increased to 3.8 this month from minus 12.7 in August. Positive readings signal growth... The Labor Department reported initial jobless claims last week rose 10,000 to 455,000, led by a jump in Louisiana reflecting job losses in the wake of Hurricane Gustav. While the Labor Department said claims would have fallen excluding the state, the overall trend in applications still points to deterioration in the labor market, economists said.

Thursday, September 18, 2008

Another Government Intervention, Another Market Plunge

The Fed has stepped in to shore up AIG. Bloomberg reports: The U.S. government took control of American International Group Inc. in an $85 billion bailout to prevent the bankruptcy of the nation's biggest insurer and the worst financial collapse in history. The Federal Reserve will provide a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management because "a disorderly failure of AIG could add to already significant levels of financial market fragility," according to a statement by the central bank late yesterday.

However, it doesn't seem to be helping markets. Bloomberg reports:

U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail. The Standard & Poor's 500 Index lost 4.7 percent, extending its decline from an October record to 26 percent and erasing half its gain from the five-year bull market that began in 2002. Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent brokerages on Wall Street, plunged the most ever... Gold and silver surged as investors turned to precious metals as a store of value... Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 20 percent to 36.22, the highest closing level since October 2002... The three-month London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, its steepest gain since 1999. U.S. Treasury three-month bill rates dropped to as low as 0.02 percent and the so-called TED spread...widened by @@0.84 percentage point to 3.02 percent.

Stocks in Europe fared hardly any better than those in the US. From Bloomberg:

European stocks posted the steepest three-day slide since 2002 after U.S. housing starts trailed forecasts and banks' borrowing costs jumped the most since 1999, deepening concern the real-estate slump and credit— market turmoil will push the region's economy into a recession... The Dow Jones Stoxx 600 Index lost 2.1 percent to 258.04, the lowest close since May 2005, bringing its three-day drop to 8 percent... With US housing starts falling yet again in August, the financial crisis looks set to continue.

Wednesday, September 17, 2008

Fed Holds Rates As CPI Falls

Amid the ongoing financial turmoil, the Federal Reserve kept its nerves yesterday, electing to keep interest rates unchanged. So did stock investors, with the S&P 500 rebounding 1.8 percent.

Economic data gave both the Fed and investors some reason to be hopeful. Consumer prices fell 0.1 percent in August while the National Association of Home Builders/Wells Fargo Housing Market Index gained two points to 18 in September.

It was a similar story in Europe. Inflation in the euro area fell to 3.8 percent in August from 4 percent in July while the ZEW index of German investor confidence rose to minus 41.1 in September from minus 55.5 in August.

The UK, however, saw inflation hit a 16-year high of 4.7 percent in September.

Still, the main concern remains the credit markets. From Bloomberg yesterday:

Credit markets seized up as the collapse of Lehman Brothers Holdings Inc. and downgrades of American International Group Inc. drove the cost of borrowing in dollars overnight to the highest level since 2001. The London interbank offered rate, or Libor, that financial institutions charge each other for loans soared 3.33 percentage points to 6.44 percent today, according to the British Bankers' Association. The increase was the biggest in its history. The rate was as low as 2.07 percent in June.

Tuesday, September 16, 2008

As Lehman Turns To Lemon, Central Banks Pour More Juice

A week after the deals on Fannie Mae and Freddie Mac, we're being treated to yet more turmoil in markets. MarketWatch reports the carnage on Wall Street.

Stocks tanked on Monday, with the Dow Jones Industrial Average plunging 500 points— the most since September 2001— after Lehman Brothers Holdings Inc. filed for bankruptcy and insurance giant American International Group Inc. scurried to raise capital even as its market value was cut in half by distraught investors... In addition to AIG, investors focused on Seattle-based thrift Washington Mutual Inc. which has entered talks with J.P. Morgan Chase & Co., but no deal is in place... In the face of the global financial storm, Merrill Lynch & Co. agreed to be bought by Bank of America Corp. in an all-stock deal valued at $50 billion... The dollar declined the most against the Japanese yen in 10 years, but gained against the euro and the British pound on thinking the Federal Reserve would cut interest rates Tuesday. Treasury prices jumped, pushing yields down the most since September 2001... Gold futures also rallied as Wall Street's troubles raised demand for safe-haven investments, with the contract for December delivery gaining $22.5 to close at $787 an ounce on the New York Mercantile Exchange. Oil futures tumbled to a seven-month low, with key refineries in the Gulf of Mexico apparently spared major damage from Hurricane Ike, with crude for October delivery falling $5.47 to close at $95.71 a barrel on Nymex.

The latest financial turmoil will only add to problems in the real economy.

Economic data had the Fed reporting U.S. industrial output fell 1.1% in August, the largest drop since Hurricane Katrina three years ago, and far worse than the 0.3% predicted by analysts. Separately, the New York Federal Reserve Bank reported manufacturing activity in the region declined earlier in the month, with the Empire State index falling to negative 7.4 in September from 2.8 in August.

Meanwhile, central banks aren't sitting on their hands. Reuters reports:

Central banks mobilized worldwide on Monday to reassure financial markets after Lehman Brothers filed for bankruptcy protection and news that Merrill Lynch, another Wall Street giant long seen as too big to fail, was being sold... [The Federal Reserve] announced emergency measures for lending operations which effectively relax the terms on which commercial banks can borrow from the U.S. central bank... The ECB held a money market operation where it allotted 30 billion euros in one-day liquidity to banks, only a third of the level demanded... The Bank of England put an extra 5 billion pounds into the financial system after receiving bids of nearly five times the amount of three-day funds available. The Swiss National Bank also provided extra liquidity to the money market.

And China is easing monetary policy. Again from Reuters.

China's central bank acted decisively on Monday to prop up the country's slowing economy by cutting the cost of bank loans for the first time since February 2002. Against a background of acute stress in global financial markets, the People's Bank of China also lowered the reserve requirement for all banks, except the five largest and the Postal Savings Bank, by 1 percentage point.

But Paul Krugman wonders whether policymakers— specifically US Treasury secretary Henry Paulson— could have done more.

... [T]here was no aid, and apparently no deal. Mr. Paulson seems to be betting that the financial system...can handle the shock of a Lehman failure. We’ll find out soon whether he was brave or foolish

.

But maybe Krugman is wrong about Paulson. Maybe Paulson is just being realistic— the government can't afford to put more public funds on the line. From Willem Buiter:

[S]ince Bear Stearns crashed, the US Treasury has, through its de-facto nationalisation of Freddie and Fannie, taken an additional $1.7 trillion of debt on its balance sheet, as well as a $3.7 trillion exposure to mortgage— and MBS-guarantees, with a fair value of around $350 bn... If the US Treasury, either directly or indirectly...were to offer financial support for a rescue of Lehman or for any other investment bank (or commercial bank, for that matter), the floodgates could open and the fiscal-financial position of the US Federal government could be materially affected. Japan not that long ago shared a sovereign credit rating with Botswana. A trillion here, a trillion there and the US Federal debt could lose its triple-A rating.

Saturday, September 13, 2008

US Retail Sales And Eurozone Industrial Production Fall

The data from the US on Friday were mixed. Bloomberg reports that retail sales fell in August.

Sales at U.S. retailers unexpectedly dropped in August...

The 0.3 percent decline in purchases followed a 0.5 percent drop in July, the Commerce Department said today in Washington. Excluding automobiles, purchases were down 0.7 percent, the most this year... Excluding gasoline, purchases were unchanged last month after a 0.6 percent decline in July. But consumer sentiment improved in September.

... The Reuters/University of Michigan index increased to 73.1 this month from August's reading of 63. The measure averaged 85.6 in 2007.

And producer prices fell in August.

Prices paid to producers decreased 0.9 percent, more than forecast, as energy costs fell by the most in almost two years. Petroleum, home heating oil, natural gas and gasoline prices all retreated. So-called core producer prices, which strip out fuel and food costs, rose 0.2 percent, in line with forecasts.

Meanwhile, industrial production is weakening elsewhere in the world. For example, in Europe, as Bloomberg reports.

European industrial production fell more than economists forecast and payrolls grew at the slowest pace in almost two years as the region's economy teetered on the brink of a recession. Output in the 15-nation euro area fell 0.3 percent from June, its third consecutive drop, the European Union statistics office in Luxembourg said today. The drop exceeded the 0.2 percent median forecast of 31 economists in a Bloomberg news survey. A separate report showed employment growth eased to 0.2 percent in the second quarter from 0.3 percent in the first... A separate report from the Bank of France showed that French manufacturing confidence held near a five-year low in August as orders declined.

And also in China. AFP/CNA reports:

China reported an easing in industrial output Friday, providing further evidence its economy is slowing amid a global slump and reinforcing expectations Beijing will move to spur growth. Industrial output growth eased to 12.8 per cent in August, down 4.7 percentage points from a year earlier, figures released by the National Bureau of Statistics showed. In the first eight months of the year, industrial output expanded 15.7 per cent from the same period in 2007, the bureau said.

On a more positive note, growth in Japanese industrial production for July has been revised up to 1.3 percent from 0.9 percent previously reported.

Friday, September 12, 2008

Japan's Economy Shrinks

Japan reported today that its economy shrank more than previously estimated in the second quarter. Bloomberg reports:

Japan's economy contracted more than the government initially estimated last quarter after figures showed businesses cut spending. Gross domestic product shrank an annualized 3 percent in the three months ended June 30, the Cabinet Office said today, more than the 2.4 percent drop reported last month. The median estimate of 27 economists surveyed by Bloomberg News was for a 3.1 percent contraction... From the first quarter, the economy shrank 0.7 percent, the biggest drop since the third quarter of 2001 and more than the 0.6 percent initially reported. Economists expected a 0.8 percent contraction.

Interestingly, trade subtracted from growth in the quarter.

Exports dropped 2.5 percent and imports fell 2.6 percent. Net exports subtracted 0.1 percentage point from gross domestic product compared with the first quarter.

The downturn may last a while. From AFP/CNA:

Japanese orders for machinery dropped for a second straight month in July, government data showed Thursday, raising further concern about the outlook for the world's second largest economy. Core private-sector machinery orders...fell 3.9 percent in July from the previous month, the Cabinet Office said, following a 2.6 percent fall in June... Japan also saw bleak data on Wednesday, with the current account surplus falling on rising energy costs and wholesale prices growing at their fastest pace in 27 years.

The US trade deficit also deteriorated in July but the underlying trend appears to be improving. From Bloomberg:

The U.S. trade deficit widened more than forecast in July because of surging energy prices that have since retreated. The gap grew 5.7 percent to $62.2 billion, the largest in 16 months, from $58.8 billion in June, the Commerce Department said today in Washington... Imports climbed 3.9 percent to $230.3 billion in July, reflecting a record $42.6 billion in purchases of crude oil that swelled the deficit with the Organization of Petroleum Exporting Countries. Excluding oil, the trade gap shrank... Exports increased 3.3 percent to $168.1 billion, led by a $1.4 billion jump in shipments of autos and parts... July's price-adjusted deficit was smaller than the average for last quarter, indicating trade will again boost growth in the third quarter.

Nevertheless, the US economy will need all the boost it can get.

The Labor Department said separately today that more Americans than forecast filed initial claims for unemployment insurance last week, and total benefit rolls rose to a five-year high. There were 445,000 first-time applications, compared with an average of 321,400 last year.

Thursday, September 11, 2008

New Zealand Cuts Rates, Global Economic Outlook Dims

The interest rate cycle has clearly turned. From Bloomberg today:

New Zealand's central bank cut its benchmark interest rate by a half point to 7.5 percent, more than expected by most economists, saying the economy is in a recession and inflation will slow. "With medium-term inflation pressures expected to ease, it is appropriate to move toward a less restrictive stance," Reserve Bank Governor Alan Bollard said in a statement in Wellington today. New Zealand's dollar dropped to a 22-year low after the statement. Bond yields fell and stocks gained. New Zealand's economy contracted in the first quarter and Bollard, 57, today joined the Treasury Department and economists in forecasting it also shrank in the three months to June 30, putting the nation in its first recession since 1998. Bollard said inflation will return below the 3 percent limit of his target range by the first quarter of 2010.

Yesterday's economic reports had also provided plenty of fodder for central banks to cut rates.

The UK economy is estimated to have fallen in the last three months. Bloomberg reports:

Gross domestic product dropped 0.2 percent in the period between June and August and fell 0.1 percent in the three months through July, the National Institute for Economic and Social Research said in an e-mailed statement. The European Commission, the European Union's executive arm, predicted that the U.K. economy will shrink in the third and fourth quarters.

The euro area isn't much better off. Bloomberg reports the rest of the European Commission's forecasts.

The European Commission cut its growth outlook for the euro area for the rest of this year and predicted a recession for Germany, the region's largest economy. The 15-nation euro region's economy will probably stagnate this quarter after shrinking in the previous three months for the first time since the euro was introduced in 1999, the Brussels-based commission said today. The commission lowered its full-year growth forecast to 1.3 percent, from 1.7 percent earlier, and signaled the 2009 outlook may also be cut... The EU forecast the euro-area economy will expand 0.1 percent in the final three months of 2008 after an estimate of no growth this quarter... While the commission raised its inflation forecast for 2008 to 3.6 percent from 3.1 percent, it said consumer-price growth "may be at a turning point" after oil prices fell from a record and as past increases in food and energy costs "gradually fade in the coming months."...

Japan's leading and coincident indices did rise in July, although they did not stop the Cabinet Office from retaining its assessment of the economy as "worsening".

Meanwhile, expectations for inflation to moderate appear to be bearing out in China as the economy shows further signs of slowing. Again from Bloomberg:

China's inflation weakened to the slowest pace since June 2007 and export growth cooled, stoking speculation the government will cut taxes and ease loan restrictions to spur the world's fourth-largest economy. Consumer prices rose 4.9 percent in August from a year earlier, less than economists estimated, after gaining 6.3 percent in July, the National Bureau of Statistics said today. Exports rose 21.1 percent in August, down from July's 26.9 percent gain, the Customs Bureau said.

Wednesday, September 10, 2008

On Second Thought . . .

The rally in stocks didn't last long at all, did it? From MarketWatch:

U.S. stocks on Tuesday staged a broad retreat, pushed down by a drop in the price of crude oil, which fed worries of a global economic slowdown, and intensifying concern about Lehman Bros. Holdings Inc.'s ability to raise capital... Rekindling concerns about the impact of the credit crisis, shares of Lehman Brothers Holdings Inc. plunged 44.6% after hopes of a capital injection from Korea Development Bank were dashed. See more. After chalking up its largest one-day gain in a month, the Dow Jones Industrial Averagenearly wiped out the prior day's gains, dropping 280.01 points, or 2.4%, to end at 11,230.73, with 24 of its 30 components finishing in the red... The S&P 500 fell 43.28 points, or 3.4%, to 1,224.51, while the Nasdaq Composite declined 59.95 points, or 2.6%, to finish at 2,209.81... Crude-oil futures dropped nearly 3% to close at their lowest level since April, with crude for October delivery off $3.08, or 2.9%, to close at $103.26 a barrel on the New York Mercantile Exchange. Read Futures Movers. Overseas, Asia stocks fell, with the Nikkei 225 slipping 1.8% in Tokyo. See Asian Markets. Europe stocks failed to hold early gains, with the pan-European Dow Jones Stoxx 600 index finishing 0.6% lower. Read Europe Markets.

Economic data for the day weren't exactly supportive either.

Stock indexes churned around earlier in the session, after the National Association of Realtors reports its index of pending home sales fell 3.2% in July from the prior month. Read Economic Report... Separately, the government said U.S. wholesale sales fell 0.3% in July after a 3% climb in June

.

In fairness, the US government's action on Sunday will probably help to attenuate the damage on the economy but will probably not stop markets from continuing their descent.

Seen from that perspective, it— and other government actions to prop up the economy— may actually be bad for investors (or homebuyers in this case) because they mostly indirectly slow down the declines in markets and draw investors into buying on the way down. As Martin Wolf says, "offering subsidised finance in a market that is beginning to fall, when one has no idea of the floor, is tantamount to debauching financial minors".

Tuesday, September 09, 2008

US Government Seizes Fannie And Freddie

The US government takes over Fannie Mae and Freddie Mac.

Markets seem to like it. From Reuters:

The immediate reaction to the U.S. government's commitment of up to $200 billion to support the two giant mortgage lenders, which together back about half the country's $12 trillion in mortgages, was positive. Thirty-year mortgage rates fell about a half percentage point from Friday to 6.0 percent, according to Bankrate.com, helped in part by the Treasury's decision to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac. The Dow Jones industrial average surged 293.52 points or 2.6 percent, while the FTSEurofirst stock index closed up 3.3 percent.

The positivity may not last though. Again from Reuters:

Every time over the last year that the U.S. government has stepped in to calm jittery markets Wall Street has scored big gains— but time and again the move higher has proven fleeting as the credit crunch has flared anew.

Monday, September 08, 2008

Surely A Recession Now

The latest employment report for the United States provides the most convincing evidence yet that the economy is in or about to fall into a recession.

On Friday, the Labor Department reported that US non-farm payroll employment fell by 84,000 in August. That was the eighth consecutive month that employment in the US has contracted based on the establishment survey. In addition, revised data show that job losses in the prior two months were 58,000 more than previously reported.

The separate household survey showed an even larger 342,000 fall in employment. Perhaps more significantly, the unemployment rate jumped to 6.1 percent from 5.7 percent in July.

The level of employment in the US in August was slightly below that of the corresponding period last year. Over that period, the unemployment rate has jumped from 4.7 percent— just above the cycle trough of 4.4 percent— to the latest 6.1 percent. Looking at the rising job losses— and the surge in the unemployment rate in particular— makes it almost inconceivable that the US economy is not in— or will not soon go into— a recession.

And yet, reminiscent of what I pointed out four months ago (see "US employment shrinking but not economic output"), other economic indicators have not been so gloomy. Remember that the economy managed to grow at an annualised rate of 3.3 percent in the second quarter.

And it is not just the second quarter. The latest surveys by the Institute for Supply Management (ISM) are also pointing to some resilience in the economy. The ISM's manufacturing PMI slipped only marginally from 50.0 in July to 49.9 in August (according to the ISM, a PMI over 41.1 generally indicates that the overall economy is expanding). Its non-manufacturing index even improved, rising from 49.5 in July to 50.6 in August.

In fact, in recent months, the ISM indices have generally been fluctuating around the 50 level and have not sustained their earlier downtrends, suggesting that the economy as a whole is weak but not collapsing. At least not yet.

Still, there is little reason to be sanguine. With both manufacturing and non-manufacturing indices at or around 50, it means that the economy as a whole is essentially flat and could easily tip into negative territory.

Meanwhile, other indicators are pointing to further weakness ahead for the US economy.

On Friday, the Economic Cycle Research Institute reported that its gauges of the economy showed little improvement. The weekly leading index rose to 126.3 in the week to 29 August from 125.4 in the previous period. Its annualised growth rate edged up to -11.7 percent from -11.8 percent in the previous week, its lowest reading since June 1980.

Also on Friday, the Organisation for Economic Co-operation and Development (OECD) released its composite leading indicators (CLIs) that showed the reading for the US falling by 0.2 point in July and was 5.0 points lower than a year ago, indicating continued slowdown in the economy.

In fact, the OECD report was quite gloomy. The CLI for the OECD area as a whole also fell, declining by 0.7 point in July 2008 and by 5.2 points from a year ago. The CLI for each and every Group of Seven country was down over July and over the preceding 12 months.

With the US economy nowadays relying so much on trade to maintain growth, the poor outlook for the OECD as a whole means it could get worse for the US.

And that would surely mean a recession.

Saturday, September 06, 2008

US unemployment rate hits 6.1%

Non-farm payrolls fell more than expected but the main focus of yesterday's employment report was the unemployment rate. Bloomberg reports:

The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five-year high of 6.1 percent, a sign that the economic slowdown is worsening two months before Americans elect their next president. Payrolls fell by 84,000 in August, and revisions added another 58,000 to job losses for the prior two months, the Labor Department said today in Washington...

Predictably, the report led to renewed talk of recession.

"It certainly increases the probability that we really are in a recession," William Poole, former president of the Federal Reserve Bank of St. Louis, said in an interview with Bloomberg Television. "It is a weak number, including the revisions."... "We're losing jobs in all kinds of industries now," Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York, said in an interview with Bloomberg Radio. "This is the clearest recessionary signal we've seen."

Markets took note too.

Traders see the Federal Open Market Committee keeping the benchmark target rate for overnight loans between banks at 2 percent through year-end, futures show. The chance of a cut in December is 8 percent, up from zero a week ago, with the probability of an increase at just 2 percent, down from 20 percent a week ago and 43 percent in July.

Some markets, however, turned around later in the day.

Yields on benchmark 10-year Treasuries rose after dropping earlier to a four-month low of 3.55 percent, and were at 3.66 percent as of 4:11 p.m. in New York. The Standard & Poor's 500 Stock Index reversed earlier losses, and was up 0.4 percent to 1,242.31.

Reuters has more on the US stock market performance.

The broader U.S. stock market edged higher on Friday, but still posted its worst week since May, as a rally in financial stocks helped reverse losses sparked by a government report showing the U.S. jobless rate rose to a five-year high. Financial shares rebounded in afternoon trading, amid hopes the U.S. Treasury would take steps over the weekend to rescue mortgage finance companies Fannie Mae and Freddie Mac. After the closing bell, The Wall Street Journal reported the Treasury is close to finalizing a plan to backstop Fannie and Freddie. Also helping financials, Lehman Brothers rose 6.8 percent to $16.20 after sources familiar with the situation said Blackstone Group LP and Kohlberg Kravis Roberts & Co KKR.UL are each looking to buy parts of Lehman's real estate and asset management units... The Dow Jones industrial average rose 32.73 points, or 0.29 percent, to 11,220.96, but ended down 2.8 percent on the week. The Standard & Poor's 500 Index climbed 5.48 points, or 0.44 percent, to 1,242.31, ending down 3.2 on the week. The Nasdaq Composite Index, meanwhile, slipped 3.16 points, or 0.14 percent, to 2,255.88, ending the week 4.7 percent lower.

The employment picture did show improvement north of the border, as Canada added 15,200 jobs in August with the unemployment rate remaining steady at 6.1 percent. However, the Ivey Purchasing Managers Index fell to 51.5 in August from 65.5 in July.

Earlier yesterday, there had also been negative news from Japan, where capital spending excluding software fell 7.6 percent in the second quarter.

And over in Europe, the gloomy news continues with Germany reporting that industrial production fell 1.8 percent in July.

Friday, September 05, 2008

Monetary Tightening Cycle Near End, Stock Markets Plunge

Reuters reports that the global monetary tightening cycle is near an end.

A raft of central bank interest rate decisions on Thursday reinforced investor opinion that the international rates cycle had peaked, with growth risks starting to outweigh the inflation worries of policymakers. The European Central and Bank of England both held interest rates steady while Sweden's Riksbank and Indonesia's central bank both raised rates by 25 basis points in moves that analysts said were likely to be their last upward tweaks in 2008.

But the ECB did perform another sort of tightening. From Bloomberg:

European Central Bank President Jean— Claude Trichet made it harder for financial institutions stung by the year-long credit crisis to exploit its lending rules. Trichet said he'll make it more expensive for banks to borrow from the ECB against most asset-based securities from Feb. 1. The ECB will increase the so-called `haircut' on the securities to 12 percent from as little as 2 percent, meaning it will lend just 88 percent of the value of the paper. Paper without a market price faces an additional 4.4 percent discount.

That didn't help investor sentiment. From Bloomberg:

The Stoxx 600 lost 2.6 percent to 278.18, the steepest drop since July 11, as the ECB and the Bank of England kept borrowing costs on hold. The measure is down 24 percent this year as the global economy cooled and financial firms posted writedowns and credit-related losses of more than $500 billion.

Neither did news on the economy.

German factory orders unexpectedly fell 1.7 percent in July, extending their longest ever declining streak and increasing the likelihood that Europe's largest economy is heading for a recession...

It was, if anything, worse for US stock markets. Again from Bloomberg:

The S&P 500 dropped for a fourth day, decreasing 38.15 points, or 3 percent, to 1,236.83, sinking the most since June 6. The Dow Jones Industrial Average lost 344.65, or 3 percent, to 11,188.23. The Nasdaq Composite Index slipped 74.69, or 3.2 percent, to 2,259.04. Eleven stocks fell for each that rose on the New York Stock Exchange.

But Thursday's US economic data yesterday weren't too bad. Bloomberg reports:

The Institute for Supply Management's index of non— manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.6... Initial jobless claims rose to 444,000 in the week ended Aug. 30, while the number of Americans continuing to collect benefits increased to 3.435 million in the prior week, the Labor Department said in Washington. A private report indicated separately that U.S. companies cut 33,000 jobs in August... ADP Employer Services said the 33,000 decline in private payrolls followed a revised gain of 1,000 for the prior month that was lower than previously estimated.

Maybe what financial markets need is a bailout. Bill Gross thinks so anyway.

[S]ystematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami... We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments... ... [I]f we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury— not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

Thursday, September 04, 2008

Europe Shrinks, US Slows

There wasn't much to cheer about in yesterday's economic data. From Reuters:

Major economies on both sides of the Atlantic are increasingly vulnerable to each other's weakness, as the euro zone teeters on the brink of recession while the United States is barely muddling through, data showed on Wednesday.

Yesterday, we got some details on eurozone second quarter economic performance.

Europe showed just how exposed its economy is to a broader downturn in the industrialized world with news that weak investment, household spending and exports all hurt in the second quarter, when the economy shrank. EU statistics office Eurostat's first breakdown of the reasons for a drop in gross domestic product in the second quarter showed the chief culprits were a more than 1 percent slide in investment as well as a fall in household spending. Declines in growth of 0.2 and 0.1 percent quarter-on-quarter in the euro zone and the wider 27-country European Union respectively have fueled fears the bloc will slide into full-blown recession.

The third quarter may not be much better.

The Markit Eurozone Services Purchasing Managers Index (PMI) rose marginally in the euro zone from July's five-year low, to 48.5 from 48.3, but remained below the 50.0 mark that divides growth from contraction for a third straight month.

There were some positive data from the US.

In the United States, factory orders rose slightly more than expected in July... Factory orders rose 1.3 percent in the month after an upwardly revised 2.1 percent gain in June, the Commerce Department said... Planned layoffs at U.S. companies were running 12 percent higher in August than a year ago, according to a report from employment consulting firm Challenger, Gray & Christmas Inc. Optimists will take heart from the fact that job cuts at U.S. companies last month were 14 percent lower than a month earlier. However, with U.S. companies' planned layoffs up 29 percent in January to August from the same period a year ago, economic damage has already been done.

There is little doubt though that the US economy has hit a weak patch. From Bloomberg:

Business across most of the U.S. was "slow" last month, while almost all Federal Reserve districts reported pressure to raise prices because of higher commodity costs, the central bank said in its regional economic survey. Consumer spending was "slow" in most of the 12 Fed districts as housing "weakened or remained soft," the Fed said in its Beige Book report, published two weeks before officials meet to set interest rates. A "general pullback in hiring" helped keep wage increases "moderate," the Fed said today.

Wednesday, September 03, 2008

Global Manufacturing Shrinks

August purchasing managers' indices show that global manufacturing activity is weak.

                 July     August     Change
US               50.0     49.9         -
Eurozone         47.4     47.6         +
Japan            47.0     46.9         -
UK               44.1     45.9         +
China            53.3     49.2         -

                 July     August     Change
Global PMI       49.0     48.6         -
Output           49.4     48.5         -
New Orders       46.0     46.8         +
Input Prices     80.9     73.2         -
Employment       50.1     49.3         -

It looks like it's time to cut interest rates. From Bloomberg:

Australia's central bank cut its benchmark interest rate for the first time in seven years amid signs the nation's $1 trillion economy is slowing. Governor Glenn Stevens and his board reduced the overnight cash rate target by a quarter point to 7 percent in Sydney today, as forecast by 22 of 23 economists surveyed by Bloomberg News.

Monday, September 01, 2008

Another Look At US Second Quarter Gdp And Durable Goods Orders

Last week saw two major positive surprises from economic reports in the United States on gross domestic product and durable goods orders. However, close reading of the numbers suggest that there are downsides to the reports.

The GDP report on 28 August showed that economic growth accelerated to an annual rate of 3.3 percent in the second quarter, much higher than the advance estimate of 1.9 percent and the first quarter growth rate of 0.9 percent. The increase was also larger than the 2.7 percent gain expected by economists surveyed by Bloomberg.

An improvement in the trade deficit was the main reason for the acceleration in GDP growth. Real exports of goods and services increased 13.2 percent in the second quarter compared with an increase of 5.1 percent in the first, while real imports of goods and services decreased 7.6 percent compared with a decrease of 0.8 percent.

The strong growth is widely seen by economists as unsustainable though. The rest of the world is already slowing— Japanese GDP fell 0.6 percent in the second quarter from the first, eurozone GDP fell 0.2 percent and GDP in the United Kingdom was unchanged. A global economic slowdown is likely to slow US export growth.

In any case, the acceleration in GDP growth may not be a proper reflection of what is happening to living standards in the US. Menzie Chinn at Econbrowser points out that the growth rates of the GDP and gross domestic purchases deflators have diverged. The price index for GDP increased 1.2 percent in the second quarter, down from a 2.6 percent rate in the first. The price index for gross domestic purchases, however, increased 4.2 percent in the second quarter, higher than the 3.5 percent rate of increase in the first.

As Chinn says, "the prices for what we produce have diverged in a significant way from the prices for what we consume". So the US may be producing more but it may not be getting richer.

The durable goods orders report on 27 August was also a positive surprise, showing a 1.3 percent increase in orders, the third consecutive monthly increase. Economists surveyed by Bloomberg had projected orders would be unchanged. June orders were revised to show a 1.3 percent increase from the 0.8 percent previously reported.

Like GDP though, the better-than-expected increase in durable goods orders has been widely attributed to strong exports— plus some boost from the economic stimulus package— and considered unsustainable by most economists.

Unfortunately, prices also played a large part in the increase. Producer prices have surged over the past few months. The producer price index for durable manufactured goods jumped 5.4 percent in the 12 months to July. The accompanying chart shows that real durable goods orders— deflated using this index— shows a declining trend similar to that exhibited by the Institute for Supply Management's manufacturing new orders index.

So the US economy is better than economists had expected but remains in a rough spot.

  M O R E. . .

Normxxx    
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